The Bank of Japan will start charging interest on some deposits it holds starting Tuesday, but most of the nation’s banks may not be ready to set negative interest rates on overnight interbank lending after Gov. Haruhiko Kuroda’s surprise Jan. 29 announcement.
The uncollateralized overnight call market — ground zero for funding markets as that is where banks lend to each other — has been the only place in Japan where interest rates stayed above zero for maturities shorter than 10 years. The overnight rate was the one targeted by the BOJ until Kuroda switched to monetary base growth in April 2013 with the move to unprecedented easing.
“Unsecured call rates are trading around zero or 0.001 percent and are likely to initially trade around zero as banks aren’t catching up with systemic preparations,” said Kenji Sato, a manager at the planning and research department of Central Tanshi Co., a Tokyo-based money-market dealer and broker. “The decision to adopt negative rates was so sudden and caught everybody off guard. Players are wary about causing systemic troubles, so they may trade around zero for now so as not to upset the system.”
The difficulties faced by Japanese lenders contrast with what happened when the European Central Bank implemented negative deposit rates in June 2014, more than a year after it first alerted markets to the possibility that it would charge banks to park excess reserves with the ECB overnight.
Only a week before the BOJ’s decision to adopt negative rates, Kuroda told the Diet that he was not considering such an option.
Yields on benchmark 10-year JGBs hit a record low of minus 0.035 percent last week amid severe global financial turmoil. Speculation has grown that policy makers will cut the deposit rate again, after announcing at the end of last month it would set it at minus 0.1 percent from Feb. 16 for some of the reserves that banks hold at the BOJ. Kuroda has said it is possible to cut negative rates further if needed.
The BOJ estimates that the initial amount subject to the minus 0.1 percent deposit rate will be about ¥10 trillion. It has not indicated a targeted level or range for money market rates or the amount subject to a negative rate that is needed to fully exert its intended effects on financial markets.
The median overnight call rate was at 0.071 percent on Friday in Tokyo, after dropping to 0.001 on Sept. 30. That was the lowest level since 2006.